Peugeot is looking at removing capacity from a plant in
Mulhouse, which has two production lines and built 224,000
vehicles last year, Pierre-Olivier Salmon, a spokesman for the
Paris-based company, said by telephone. The factory currently
can assemble as many as 452,000 cars annually.

“Our goal is to have a utilization rate of 100 percent in
our French factories” by 2016, Salmon said. A recent agreement
with unions allows the company to start talks on whether to keep
the plant’s second line open if annual production falls below
250,000 vehicles, he said.

Peugeot, which reported a first-half operating loss of 510
million euros ($685 million) in its automotive unit, aims to
reduce cash consumption by 50 percent this year to 1.5 billion
euros. It has already closed a factory on the outskirts of Paris
and is cutting 11,200 jobs in its home country by 2015.

Peugeot has posted the biggest sales drop in Europe this
year of all carmakers, with deliveries plunging 10 percent,
compared with a decline of 3.1 percent for the overall market,
according to data from the ACEA industry group.

Right Direction

Possible production cuts in France are the “natural
consequence” of the new labor deal signed last month by four of
Peugeot’s six main unions, Salmon said. Unions agreed to reduce
overtime pay and freeze salaries in exchange for investment
guarantees and a pledge not close any French factories in the
next two years. Le Figaro today was first to report the possible
capacity cuts.

“This is a really good move in the right direction,” Jose
Asumendi, a London-based analyst at JPMorgan, said by phone.
“Peugeot is taking the right decisions to restructure its
operations in Europe.”

The shares rose as much as 18 cents, or 1.8 percent, to
10.35 euros and were up 1 percent as of 11:30 a.m. in Paris
trading. The stock has gained 88 percent this year, valuing the
manufacturer at 3.65 billion euros.

Chief Executive Officer Philippe Varin is also looking for
new partners to help pay for new models and expand
internationally. The manufacturer’s plan to raise funds through
a share sale have hit a snag as Chinese carmaker Dongfeng Motor
Corp. seeks a smaller stake than first discussed, people
familiar with the matter said this week.

Capital Increase

Dongfeng is weighing buying about 10 percent, half the size
of the original proposal, said the people, who asked not to be
identified discussing private talks. The company is more
interested in expanding an existing industrial venture than
purchasing a stake, they said.

Peugeot initially proposed a capital increase of at least 3
billion euros, in which Dongfeng and the French state would take
equal stakes of about 20 percent, people familiar said last
month. A smaller Dongfeng stake would potentially give the
state, interested in protecting jobs and retaining the
automaker’s base in France, greater say.

Some in the Peugeot family, which owns 25.5 percent, are
concerned about the French government’s increased influence and
want guaranteed board seats or other protections as a
counterweight after a capital increase likely dilutes their
holding, the people said.

Another option Peugeot has would be selling its 57 percent
Faurecia SA stake, with Canadian parts-maker Magna International
Inc. and other industrial competitors showing interest in the
French supplier, people said. Peugeot thus far has said that it
intends to keep the holding.

Peugeot is also considering the sale of a stake in its
banking unit and continues to hold talks with Banco Santander SA
in Spain regarding a holding in Banque PSA Finance, people
familiar said.